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By: Garret
With the ebb and flow of popular digital currencies, many wonder what place these virtual instruments have in real economics. The moniker of one of the most popular cryptocurrencies comes from the the popular "Doge" meme, which depicts a Shiba Inu dog sporting an anthropomorphic grin, thinking silly and disjointed dog thoughts. The viral character of this internet meme was enough to support a novel online means of exchange, but many are unsure if the dream of currency free from the banking system has yet become a reality. If this reality had its own digital mascot, decentralized banking might appear to be well on its way to mass adoption, but in the case of Dogecoin, the future of the dream is unclear.
A cryptocurrency is a complex instrument created by technology hobbyists and cryptography enthusiasts. To understand Dogecoin, we’ll start with some background regarding cryptocurrencies, referred to colloquially as crypto. More than likely, you've heard something about Bitcoin. Conceived in 2009, Bitcoin is the first mainstream cryptocurrency, and continues to hold the crown as the most widely-used.
Bitcoin was invented by an anonymous person (or group of people) working under the alias “Satoshi Nakamoto” to provide a digital alternative asset to major government-backed currencies such as Dollars, Yen, or Euros.
Most cryptos (including Dogecoin) are based on a technology called Blockchain, which was invented by "Nakamoto" and described in the original Bitcoin whitepaper. Blockchain is a distributed ledger, which allows a group of unassociated people or businesses to ratify financial transactions online via a network of computers, connected only via the internet. The financial transactions tender in the form of virtual coins which can be exchanged for real currency on an online exchange.
The ability to create or “mine” a crypto coin or token is generally based on advanced mathematical concepts that underpin cryptographic encryption and authentication. As Bitcoin only exists in ledger form and has no physical representation, and with nothing material backing the transactions, how can we be confident that it's actually worth anything?
Detractors of mainstream currency will point out that government "fiat" is no longer fungible for gold and exists today primarily in digital form as well. The difference between government currency and crypto is that fiat is guaranteed by and can be controlled by a governmental authority which may support it through taxation and monetary policy, whereas crypto is defined by covenants agreed upon by the entities who mine and trade the currency.
Bitcoin became widely popular beyond its founding communities and started to increase drastically in value in 2011. As more people studied Bitcoin, digital libertarians discovered imperfections in the digital currency and identified opportunities to create their own forms of token. In response, developers began to offer alternative cryptocurrencies which were eventually dubbed “alt-coins.” One of these so-called “alt-coins” is Dogecoin.
Based on a popular meme, some may consider Dogecoin to be a joke, and with much of the underlying software and covenants defining the crypto copied directly from an existing alt-coin called Luckycoin, the currency was originally created as a wry commentary on cryptocurrency and the abundance of so-called "alt-coins." A large online community emerged on reddit to exchange the low-priced currency as a form of digital "kudos" and as with Bitcoin, the cryptocurrency increased in value as it became more well-known. Today, the widely traded online currency's "market cap" numbers in the hundreds of millions of dollars.
A primary defining aspect of many cryptocurrencies is that they can be “mined” or produced using a mathematical process that is computed on increasingly sophisticated computational machinery. Bitcoin is typically mined on “farms” of large machines built specifically with custom silicon to produce a profit for the miner. In Blockchain protocols, miners compete to ratify “blocks” of transactions to produce a “reward” of some amount of the coin being mined. The reward can vary over time based on some defined set of parameters to ensure that the incentive is balanced and that the number of coins outstanding doesn't expand in size too quickly. Dogecoin, similar to it's predecessor, Luckycoin, originally produced a random reward, but Dogecoin's creators quickly changed this to a reward schedule not long after the currency gained adoption.
One drawback of Bitcoin and other "alt-coins" is that mining is dominated by a small group of syndicates using custom hardware. This is possible because Blockchain creation relies on the ability to solve a cryptographic puzzle before other miners can do so in order to obtain the reward for ratifying the block of transactions. The first miner to solve the puzzle is granted a "reward" in newly minted coins. Large miners with specialized equipment can trawl over millions of potential solutions a second, essentially reducing the chance of individual miners to obtaining a reward to zero. Dogecoin uses a math function based on something called scrypt rather common cryptographic technology such as SHA-256, initially rendering it more difficult for large miners to build farms with existing Bitcoin hardware, thus opening the market for anyone with a computer to mine coins and potentially reap the reward for promoting the currency. Nonetheless, due to the popularity of Dogecoin and a massive glut of digital gold seekers, an amateur with a simple computer cannot hope to mine Dogecoin profitably.
A final contrast to Bitcoin is related to Dogecoin's "inflationary" characteristic. Bitcoin has a hard limit of the overall supply, whereas Dogecoin defines no ceiling to the number of coins that can be produced. This means that Dogecoin could eventually decrease in value as a result of new currency flooding the market. Systems such as increased mining difficulty are however in place to limit the amount of new Dogecoins minted each year.
Dogecoin's popularity is probably not due to its stronger tech, but rather it's image and marketability. In concordance with this friendly image, Dogecoin has been used for charitable causes, the most notable fundraiser being one that allowed the Jamaican bobsled team to compete in the 2014 Winter Olympics. In 2014, "Dogecoin" even sponsored a NASCAR driver in Talladega. It may have been possible that Dogecoin could maintain this friendly and fun image, and users could see it as a niche instrument rather than a money-making scheme.
However, an apparent unscrupulous profit-seeking element eventually emerged from the feelgood hype and hoopla surrounding Dogecoin. Some charitable initiatives, such as a drive which raised $7000 to sponsor an Indian luge athlete, turned out to be likely scams. An exchange called Moolah marketed itself to the online Dogecoin community, promising online trading and legitimacy for Dogecoin, and potentially elevating the currency beyond it's happy-go-lucky "joke" status, into a legitimate medium of exchange. The founders managed to extract a large investment from the community, but the exchange failed to achieve viability and never truly got off the ground.
The founder of Moolah was later revealed to be an infamous digital opportunist operating under an alias, and the Moolah exchange was shuttered amongst accusations of fraud and money laundering by the British government. Moolah eventually filed for bankruptcy.
Despite all of this past drama, Dogecoin continues to be exchanged electronically for Bitcoin, USD, and CNY, and is the 20th largest cryptocurrency by market cap. Before trading or investing in a cryptocurrency, one might be interested in visiting the Dogecoin founder's Youtube channel to view some informative discussions regarding the technical underpinnings of cryptocurrencies.
In the end, the saga of Dogecoin may leave its followers as confused and bewildered as its namesake. Perhaps Dogecoin is just another chapter in the age-old story on the failure of markets, as constructs based on irrational exuberance and generosity devolve into greed and cynical opportunism.
Very true story about the "cute" coin...